More on AWG
AWG
First half turnover and profits fell as AWG sold off its international businesses in the previous year. However, continuing operations first half turnover was up 3.2% to £890 and operating profit was up 2.8% to £171m before exceptionals and goodwill.
Anglian Water, the regulated business increased both turnover and operating profit to £396m (+2.1%) and £170m (+2.3) respectively. Although power and material costs increased operating costs were in line with the previous year.
Ofwat, the water regulator, sets price limits on a five yearly basis. The recalculation of the business plan submitted by the company to Ofwat, assumes a £4 per property savings from future efficiency improvements over the five years. However the regulator expects a £22 per property efficiency savings in its final determination. Efficiency savings are passed on to the customers by reducing the increase in bills by the expected amount.
With efficiency savings taken into account when setting prices, AWG must achieve the savings to maintain profitability. AWG plans to cut jobs to reduce costs and is looking for further avenues to improve efficiency, but none were mentioned in the first half announcement.
AWG’s infrastructure management business (Morrison) increased profits from £5.5m to £7.1m
Future profitability depends on the regulator and on the company’s ability to control costs, in view of the efficiency improvement taken into account by the regulator. In the final determination announced by Ofwat, Anglian will increase bills on average by 2.4% + inflation per annum over the next five years.
The non-regulated businesses are small, making 4% of operating profits. Morrison’s order book increased by £834m to £2.6bn. The orders are primarily longterm and framework contracts, so the additional business is sustainable.
AWG shares trade at a prospective PE of 15.9× (812p) at the higher end of the range for the sector as is the 6.0% yield.
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